McClatchy's Big Bet on Old Media

If newspapers have a future, the $4.5 billion deal for Knight Ridder could be a bargain. But that's a big "if"

Gary Pruitt, the chairman and CEO of Sacramento-based McClatchy (MNI), sounded convincingly authoritative when he answered a reporter's inquiry about the speed with which newspapers' classified ads will move to mobile platforms like cell phones. "In five years," he said, "17.2% of all classifieds will be delivered on mobile devices."

Then Pruitt paused. "I'm kidding," he confessed. "We don't know what's going to happen."


  But Pruitt was entitled to his jollies in a conference call with journalists. Capping a months-long and much-discussed process, McClatchy announced Mar. 13 it had reached a definitive agreement to purchase newspaper giant Knight Ridder (KRI), publisher of 32 daily newspapers. As part of the deal, McClatchy said it would sell 12 of the Knight Ridder papers.

The cash-and-stock deal is valued at $4.5 billion, which does not include the assumption of around $2 billion in Knight Ridder debt. That price nets out to $67.25 per share. This was but a slight premium over the $62.46 that Knight Ridder stock traded at midweek, before McClatchy was reported to be the lead dog in the final bidding process.

However, analysts had expected Knight Ridder shares to fall drastically in the event its board did not approve a deal when they met to discuss it Mar. 12. According to a report issued by Prudential Securities analyst Steven Barlow, the sale price represents a 9.5 multiple of Knight Ridder's projected 2006 earnings before interest, taxes, depreciation, and amortization. Being a bit below accustomed multiples for newspaper companies, this figure reflects investors' concerns over newspapers' tough competitive landscape. (See BW, 1/9/06, "The Daily Paper of Tomorrow".


  The sale marks a bitter end to the career of Knight Ridder Chairman P. Anthony Ridder, the family scion who was forced to preside over the dissolution of the company founded by Herman Ridder in 1892. (See BW, 11/21/05, "Where Ridder Went Wrong").

But the deal marks a major ascension for Pruitt, and puts him in a new and certain to be more-closely watched role. The 49-year-old CEO, long considered a major emerging executive in newspapers, now presides over a substantially larger portfolio. McClatchy, which publishes 12 daily and 17 community newspapers, took in $1.3 billion in revenues last year. Including the Knight Ridder papers McClatchy will be keeping, that figure swells to $2.8 billion.

The deal also comes as a relief to those Knight Ridder employees who are now going to be working for McClatchy. They will be employed by a newspaper company that's managed to win kudos from Wall Street, journalists, and ex-journalists concerned about the quality of newspapering these days. They faced an uncertain prospects in the sale, given that at least one major Wall Street analyst -- Morgan Stanley's Doug Arthur -- issued a detailed report during the sale process that identified ways a potential buyer of Knight Ridder could slash costs by $150 million a year.


  But those worries will persist at the papers McClatchy isn't going to keep. Among the properties McClatchy plans to sell are some of Knight Ridder's most storied and biggest papers, including the Philadelphia Inquirer, the Philadelphia Daily News, and the San Jose Mercury News.

Expected to be a major player in the next round of sales: Denver-based MediaNews Group and CEO W. Dean Singleton, whose ardent desire to purchase Knight Ridder went unconsummated. In a conference call with reporters, Pruitt said he wanted to close these deals as quickly as possible, but added that none is in place yet.

Although executives familiar with the sale process warned that selling newspapers after the deal could result in a significant tax hit for McClatchy, Pruitt said in an interview that such concerns did not dilute the transaction's appeal.


  Much, in fact, remains a work in progress. Pruitt conceded that McClatchy's corporate staff is too small to manage the newly enlarged company. One very well-regarded Knight Ridder executive, senior vice-president Hilary Schneider, served alongside senior vice-president Art Brisbane in major operational roles at that company, but Pruitt said no decisions had been made concerning what positions they may play in McClatchy.

But the executive bona fides of Pruitt-and those he may or may not hire were not sufficient in one key regard: Convincing Wall Street of the deal's wisdom. On Monday, McClatchy shares fell about 3%, to $51.55. Betting on newspapers, as Pruitt has done, remains a tough sell, even at reasonable valuation levels.

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